Buyers reassess high-octane options as risk appetite returns; A painful day for DIY investors
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Currency questions
The past 24 hours mean allocators are again scrutinising what rising rates mean for growth and value stocks. The rule of thumb remains, as per usual, that it’s bad for the former and good for the latter.
But when they turn to their other risk assets, it’s not interest rates but currencies that could have an outsized impact. And as risk appetite ramps up again, that means emerging markets’ relationship with the US dollar is also back in focus.
EMs have put in some of the ground work already: keeping a lid on the pandemic has helped spur on economic recovery in many countries, and Chinese A-Shares in particular have soared in 2020. By contrast, Hong Kong listed shares have struggled – this will go down as the year when many wealth managers added A-Shares funds to their portfolios for the first time.
It’s not just China. Year to date, the MSCI Asia ex-Japan index is now above the S&P 500 in both local currency and sterling terms. The broader Emerging Markets benchmark is on the verge of achieving the same result.
Add in a president-elect with a less confrontational trade policy, and things start to look brighter still. Then there's that dollar relationship: EM currencies have already rallied this week as the dollar stalls amid investors’ move away from safer havens.
This dynamic is more complicated for those investing in sterling, not dollars. The pound itself could start rising if a UK/EU trade deal is agreed this week. Nonetheless, emerging markets might be returning to a few more fund selector radars as buyers look ahead to 2021.
Weak foundations?
Days like yesterday don’t come around too often in markets. And when shares are moving sharply, retail investors want to get involved. Unfortunately, many on both sides of the Atlantic were left disappointed on Monday.
On these shores, companies like Hargreaves Lansdown, AJ Bell and Fidelity saw their sites sag under the weight of interest. Hargreaves said its site had experienced its busiest ever day. It was a similar story in the US: Charles Schwab’s site went down, and there were reports of problems on several others.
Given how quickly prices reacted to the Pfizer news, yesterday was also a prime example of how timing the market is all but impossible. But whether or not these outages saved investors from themselves is besides the point. Investors wanting to rotate their portfolios – for the short-term or for the long-term – struggled to do so.
This isn’t the first time that growing retail volumes have created issues for big platforms this year. In the US, Vanguard previously experienced problems on August 31 when both Apple and Tesla announced stock splits. Newer services like Robinhood were dogged by repeated issues during March’s market slump. The rise of the retail investor is being closely studied by other market participants, anxious to see whether they’re increasing volatility or even putting a floor under some asset prices. Yesterday’s developments emphasise there are other factors to consider.
The merits of advised or outsourced portfolios shine a little brighter each time a retail site proves unable to cater to demand. Of course, those outages are never going to be enough in themselves to drive investors to an intermediary. But they will remind D2C investors that a DIY approach isn’t always as user-friendly as it first appears. With every incident, professional, reliable trading facilities might become a little more of a USP.
High-yield lows
While US government bond yields were rising yesterday, riskier bonds moved in the other direction – as you’d expect, given the renewed prospects for economic recovery.
Two weeks ago, M&G’s bond team noted that yields were already back to pre-Covid levels (though spreads remained higher at that stage). On Monday, US junk bond yields dropped to their lowest-ever levels.
After another decade of rising prices, allocators are more than accustomed to record-low yields nowadays. But it’s worth noting that this high-yield record had stood since 2014, according to Bloomberg. Back then, the Bloomberg Barclays US Corporate HY index yielded 4.83 per cent. On Monday, it touched 4.56 per cent. That will give more pause to those who’ve already banked a lot of credit gains so far in 2020.